Getting a mortgage refinanced resembles entering a labyrinth in a blindfold for beginners. And you and your spouse surely heard that rates are falling and dreamed about the reduction of your monthly payment. Running to the nearest mortgage broker without any preparations is similar to buying a parachute after you jumped out of the airplane. Let me tell you how it is supposed to be done right and how it could save you money rather than waste your time.
Firstly, you need to understand your situation well before visiting a loan officer. You should get your credit scores from Experian, Equifax, and TransUnion. Credit score above 740 provides the best rates but even the score equal to 680 is acceptable. Moreover, you should calculate your Loan-to-Value ratio by dividing your balance by the appraised value of your property.
A lender would prefer to see a Loan-to-Value below 80 percent since it means that you have already twenty percent equity. In case you have recently purchased the house with the small down payment, you may face a problem of paying the Private Mortgage Insurance once again. The extra fee will nullify your savings on the interest rate making your refinance pointless. Do the calculations with the help of mortgage calculators such as those offered on Bankrate or NerdWallet.
Treat the offers of loan quotes like you buy a car and get at least three to five of them from various sources. It might be not only commercial banks but also credit unions such as Navy Federal or community banks. Each of them will offer you a Loan Estimate and it will become much easier for you to compare fees. Pay attention to closing costs which are usually between two and five percent of the total loan amount.
You may try to negotiate them or get a lender credit compensating closing costs with higher interest rates. Then the refinance will be called “no-closing-cost” and it could be reasonable for you if you plan to sell your house within several years. But in case you want to stay there for a long period of time, it is better to pay upfront fees since they may turn out cheaper. You should take into account break-even point showing how many months you should pay in order to cover upfront costs.
The process itself requires a number of documents and you need to gather all of them before applying. The lender will perform an appraisal of your property in order to establish its current value and it is your own responsibility. The process of appraisal might become stressful since it may lead to cancelling of the entire deal if you have lost some equity. Remember that underwriting requests the same documents three times.
After you have closed the refinance, do not celebrate your reduced monthly payment and forget about the old one. Set automatic payments for your new mortgage so that not to miss the due date. Allocate the freed up funds in order to eliminate other debts and create your emergency fund.
As you see, refinancing is a very powerful tool but it requires certain knowledge. It does not provide you with the free money or magic solutions. In fact, it resets the term of your mortgage to thirty years instead of twenty eight years. So make sure that new terms are suitable for you and your spouse.